For a business owner considering a sale, the Letter of Intent—or LOI—is a significant milestone in the transaction process.
A Letter of Intent is a preliminary agreement that outlines the principal terms under which a buyer proposes to acquire a business. It typically addresses the proposed purchase price, transaction structure, payment terms, due diligence, exclusivity, and other major deal points.
An LOI is often described as “non-binding,” but that does not mean it should be treated casually. Certain provisions are commonly binding, and the economic and structural terms established in the LOI can influence negotiations throughout the remainder of the transaction.
For sellers, the LOI is an opportunity to establish the framework for the deal while they still have meaningful negotiating leverage.
What Is a Letter of Intent in a Business Sale?
An LOI records the buyer’s and seller’s preliminary understanding of the major terms of a proposed business transaction.
The LOI typically follows initial discussions and negotiations between the parties. Once signed, it provides a framework for due diligence and preparation of the definitive purchase agreement.
An LOI may address:
- Purchase price
- Transaction structure
- Payment terms
- Working capital
- Debt and cash
- Earnouts
- Seller financing
- Due diligence
- Exclusivity
- Confidentiality
- Closing conditions
- Expected timing
The exact terms vary by transaction, but the underlying purpose is the same: to establish agreement on the major principles before both sides invest significant time and resources in completing the transaction.
Is an LOI Legally Binding?
Usually, the parties do not intend an LOI to obligate either side to complete the transaction, but specific provisions may be legally binding.
Common binding provisions can include:
- Confidentiality
- Exclusivity
- Access to information
- Expenses
- Governing law
- Other procedural obligations
The exact effect depends on the language of the document and applicable law.
Business owners should therefore have transaction counsel review the LOI carefully before signing it. “Non-binding” does not mean “without consequences.”
What Terms Are Included in an LOI?
Purchase Price
The proposed purchase price is usually the most visible term, but sellers should look beyond the headline number.
An LOI may refer to:
- Enterprise value
- Equity value
- Cash-free, debt-free value
- Value subject to a working capital adjustment
- Contingent consideration
A $10 million purchase price can result in very different seller proceeds depending on how the transaction is structured.
The key question is:
How much of the proposed consideration will the seller actually receive at closing?
Transaction Structure
The LOI should identify the proposed structure, such as:
- Asset purchase
- Stock purchase
- Merger
- Other acquisition structure
The structure can have significant legal and tax consequences.
A buyer’s preferred structure is not automatically the structure that produces the best result for the seller, so legal and tax advisors should be involved early.
Payment Terms
The purchase price may consist of several forms of consideration, including:
- Cash at closing
- Seller financing
- Earnout payments
- Rollover equity
- Escrow or holdback
These components do not carry the same risk.
A seller should distinguish between the headline purchase price and the amount of cash that will actually be received at closing.
What Is an Earnout?
An earnout is a portion of the purchase consideration that is paid only if specified future conditions or performance targets are achieved.
Earnouts may be based on:
- Revenue
- EBITDA
- Gross profit
- Customer retention
- New business
- Other agreed-upon milestones
An earnout can help bridge a valuation gap between buyer and seller, particularly when the seller has strong expectations for future growth.
But it also creates risk because the seller may no longer control the business after closing.
If an LOI includes an earnout, the parties should establish a clear framework for how the metric will be measured and what happens if the buyer changes the company’s operations, accounting practices, staffing, pricing, or strategy.
What Is Seller Financing?
Seller financing occurs when the seller receives part of the purchase price over time rather than receiving the entire amount at closing.
The seller effectively becomes a creditor of the buyer.
Important terms include:
- Interest rate
- Repayment schedule
- Term
- Security
- Guarantees
- Subordination
- Default provisions
- Prepayment rights
Future payments should not automatically be viewed as equivalent to cash at closing. The seller should understand the credit risk and protections associated with the financing.
What Is a Working Capital Adjustment?
A working capital adjustment is a mechanism used to determine whether the business is delivered with the level of operating working capital expected at closing.
The LOI may establish that the transaction will be completed using a normalized working capital target.
Sellers should understand:
- How working capital will be defined
- Which accounts are included
- How the target will be calculated
- How historical performance will be considered
- How differences at closing will affect the purchase price
Leaving the methodology vague can create disagreements later, when the parties have already invested substantial time in the transaction.
What Is Exclusivity in an LOI?
An exclusivity, or no-shop, provision restricts the seller from negotiating with other potential buyers for a specified period.
From the buyer’s perspective, exclusivity provides protection for the time and expense invested in diligence and negotiations.
From the seller’s perspective, it reduces negotiating leverage.
Before agreeing to exclusivity, sellers should consider:
- Length of the exclusivity period
- Extension rights
- Buyer milestones
- Seller termination rights
- Expected diligence timeline
A seller should be cautious about granting a lengthy exclusivity period without clear expectations for the buyer’s progress.
Why Does the LOI Matter So Much?
The LOI matters because it establishes the negotiating framework for the remainder of the transaction.
Once the parties agree to the major economic terms, it can become more difficult to reopen those issues later.
The LOI also establishes expectations before the seller begins extensive due diligence, legal negotiations, and preparation for closing.
That makes the LOI an important negotiation milestone—not simply paperwork that comes before the “real” agreement.
Can the Purchase Price Change After an LOI Is Signed?
Yes. The seller’s ultimate proceeds can change after an LOI is signed depending on the transaction structure, diligence findings, and closing adjustments.
Potential causes include:
- Working capital adjustments
- Debt or debt-like items
- Material changes in performance
- Customer losses
- Legal or tax issues
- Capital expenditure requirements
- Other findings during due diligence
The LOI establishes the intended framework, but the definitive purchase agreement ultimately governs the transaction.
What Should Sellers Review Before Signing an LOI?
Sellers should evaluate the LOI as a complete transaction—not simply focus on the proposed purchase price.
The most important areas to review include:
1. The Real Economics
Determine how much is paid at closing, how much is contingent, and what deductions or adjustments could apply.
2. The Transaction Structure
Understand the legal and tax implications of the proposed structure before agreeing to it.
3. Earnout Terms
If an earnout is involved, understand exactly how performance will be measured and what control the seller will have after closing.
4. Working Capital
Make sure the methodology for calculating the working capital target is reasonable and consistent with the way the business actually operates.
5. Exclusivity
Understand how long the seller will be restricted from pursuing alternatives and what happens if the buyer’s process stalls.
6. Closing Conditions
Review the conditions that must be satisfied before the buyer is obligated to close and determine whether they give the buyer excessive discretion.
7. Post-Closing Obligations
Understand expectations for transition services, employment or consulting, restrictive covenants, customer introductions, or other post-closing responsibilities.
Should Owners Get an LOI Reviewed Before Signing?
Yes. Owners should generally have experienced transaction counsel and appropriate financial and tax advisors review an LOI before signing it.
Each advisor can evaluate different aspects of the proposal.
Legal counsel can assess the binding provisions, transaction structure, restrictions, and legal protections.
Tax advisors can evaluate the tax implications of the proposed structure and consideration.
A valuation or M&A advisor can help the owner evaluate the economics, proposed price, deal structure, and negotiation strategy.
Ideally, these advisors are involved before the LOI is finalized, when the seller still has the ability to negotiate important terms.
What Happens After the LOI Is Signed?
After signing, the transaction typically moves into:
- Due diligence
- Definitive purchase agreement negotiations
- Financing and third-party approvals, when applicable
- Resolution of diligence issues
- Final closing conditions
- Closing and transfer of ownership
The LOI provides the framework. The definitive purchase agreement contains the detailed legal terms governing the transaction.
This is why getting the major economic and structural issues right at the LOI stage matters.
The Bottom Line: The LOI Sets the Stage for the Deal
An LOI is often the point where a potential business sale becomes a defined transaction.
For sellers, the most important lesson is that the highest headline purchase price is not necessarily the best offer.
The amount paid at closing, earnout structure, working capital provisions, seller financing, exclusivity period, closing conditions, and post-closing obligations can all materially affect the seller’s outcome.
Before signing, owners should understand not only what the buyer is offering, but what the seller is agreeing to and what remains open for negotiation.
The time to identify concerns is before the LOI is signed—when the seller generally has the greatest negotiating leverage.
At George & Company, helping privately held business owners understand value, transaction economics, and the factors that influence a successful transition is an important part of the advisory process. A well-informed owner can approach LOI negotiations with a clearer understanding of both the opportunity and the risks.